China E-Commerce: Resistance is Futile

The PRC National People’s Congress last week promulgated a second discussion draft of the PRC E-Commerce Law (电子商务法草案). If you are interested in commenting, you can find the new statute and a portal for comments here.

This statute is an attempt to gain greater control over the online consumer markets. These markets have exploded in China, in a situation where there is little or no regulation. The lack of regulation has not slowed development of e-commerce in the PRC. The success of online marketing is shown by the recent results of Alibaba’s November 11 “Singles Day” online sales event. As reported by ZD Net, the results were impressive:

Alibaba Group has raked in US$25.3 billion (168.2 billion yuan) in gross merchandise volume (GMV) from its annual online shopping festival, breaking last year’s record sales by 39 percent.

Held on November 11, its Singles Day shopping bonanza this year involved more than 140,000 participating merchants, including 60,000 international brands. Some 165 of these each generated more than US$15.1 million (100 million yuan) in sales, including Gap, Nike, and Samsung, with 17 merchants exceeding US$75.4 million (500 million yuan) and six surpassing US$150.9 million (1 billion yuan) in sales.

Japan, Australia, and Germany were amongst countries with the most sales selling into China during Singles Day this year.
At its peak, Alibaba processed 256,000 transactions per second and US$1 billion (6.6 billion yuan) was processed within the first couple of minutes. In the first two hours, it registered US$11.9 billion (78.8 billion).

As you can see, foreign products played a big part in the success of the Singles Day event. Section 5 of the Discussion Draft sets out the proposed rules for cross-border sales. The Singles Day even illustrates the way the Discussion Draft plans for the future of cross-border online sales:

1. Foreign retailers will not be permitted to directly participate in online sales in China. All online sales will be limited to Chinese owned entities that have obtained the required commercial ICP license. Though there had been some hope there would be a limited exemption to the ICP license rule for e-commerce product sales, there is no hint of such a change in the Discussion Draft. The PRC government intends to continue restricting e-commerce sales to Chinese owned or controlled entities.

2. Foreign-owned operators of e-commerce platforms will also be excluded from operating in the Chinese market. Sales of foreign products will be forced to come into China through Chinese owned or controlled platforms.

3. The Discussion Draft provisions on cross-border e-commerce focus on ensuring cross-border sales comply with Chinese law and only approved products are imported into China and all taxes and duties on those products get paid. The Discussion Draft seeks to shut down online sales as a way to import illegal products into China and to shut down online sales as a method for evading China taxes and import duties.

4. The method for control proposed by the Discussion Draft is to create highly centralized e-commerce processing centers. The China (Hangzhou) Cross-Border E-Commerce Processing Pilot Area is an example of the ultimate goal. The idea is that these centers will handle the procedures related to e-commerce: foreign purchase, shipping to China, import into China with full compliance with all PRC applicable regulations on product approval, inspection and quarantine, payment of duties and taxes, and warehousing and distribution.

The plan is to funnel all cross-border e-commerce through a limited number of processing centers, all of which are controlled by the national government. These processing centers will also be under the control of a single e-commerce sales platform. The Hangzhou Center will be controlled by Alibaba, with competing online sales giants in China presumably establishing and controlling their own competing centers. This would be the opposite of the freewheeling approach that typifies e-commerce development in the U.S. It is though quite consistent with the current domination of retail e-commerce in the U.S. by a limited group of large players.

The success of the Alibaba event shows that the model envisioned by the Discussion Draft is already fully functioning. Foreign retail brands were excluded from direct sales. They were instead funneled through the single channel provided by Alibaba. Alibaba assumed all liability for compliance with PRC rules and regulations. No foreign entity was involved in any way with the actual direct sale of its product or with any direct relation to any Chinese consumer; all of this was handled by Alibaba.

This is the future of e-commerce in China. For foreign brand owners that want to penetrate the PRC online sales market, the Discussion Draft makes clear how the system will work.

Steve focuses on assisting foreign companies in doing business in and with China. He prides himself on working in the “real” China: the world of factories, fish plants, and farms that lie outside of Beijing and Shanghai. Having mastered the Chinese language and legal system, Steve’s unique expertise makes him an invaluable resource to our clients.

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